Persistent Systems shares dive 11% to hit 52-week low; here's why

Shares of Persistent Systems Ltd tumbled 10.91 per cent to touch their one-year low of Rs 4,312.15 in Monday's trade after the company announced the acquisition of Nagarro SE, a Germany-based IT services company, for a transaction value of EUR 1.27 billion, implying a valuation of roughly 1.3x EV/sales.

"The acquisition is aimed to diversify Persistent's business into Europe and ME, verticals of Manufacturing, Retail and Public services while adding SAP and CX capabilities," Nuvama Institutional Equities stated.

"We like the business logic of the acquisition along with the reasonable transaction valuations. However, the transaction is likely to lower the growth profile of Persistent while imparting integration risk to its business," it added.

"With these, we believe current valuations, already rich at 33x FY27 PE are unlikely to sustain. Downgrade to 'HOLD' with a TP of Rs 4,800 (earlier Rs 6,100), valuing it at 28x FY28 PE (versus 35x earlier)," the brokerage further said.

Elara Capital noted that Persistent has already secured a meaningful stake in Nagarro.

"Persistent has already secured a 21 per cent stake in Nagarro, with the latter's largest shareholder committing its entire holding under a binding agreement. Persistent is confident of crossing the minimum acceptance threshold of 50 per cent plus one share of Nagarro's outstanding equity. The acquisition will be financed through committed financing of EUR 1.4 billion from Barclays. The Enterprise Valuation stands at 1.2x CY26E EV/sales. We maintain SELL with an unchanged TP of Rs 4,280," Elara Capital stated.

Meanwhile, JM Financial said, "The deal is valued at ~14x EPS (based on CY27 Nagarro's consensus estimates). It would annually add ~70 per cent to Persistent's revenue post-closure. Separately, Persistent announced a long-term strategic services agreement with a global technology leader (for six and a half years with net new TCV of $650mn+ and ACV of $125mn+). All in all, we are revising FY27E-FY29E EPS marginally, given large deal ramp-up (not incorporating Nagarro acquisition); however, we are lowering target multiple to 30x FY28E EPS (earlier 34x) factoring in the integration risk. The TP thus stands revised to Rs 5,095 (versus earlier Rs 5,660); maintain ADD."